There’s an old saying that I often quote when accountants present certain VAT proposals to me: “If something sounds too good to be true, it usually is.”
The first tier tribunal case of Snow Factor Ltd (SFL) and Snow Factor Training Ltd (SFTL) (TC07439) is a good example. References in this article are to SFL and SFTL.
The appeal concerned assessments raised by HMRC for over £420,000, covering the period September 2014 to November 2016 on the basis that SFTL was not an ‘eligible body’ making exempt supplies of education (tuition services in mountaineering skills).
SFTL was effectively controlled by SFL (a commercial company), with the intention of SFTL being to make a “diversion of an income stream.” When tuition is provided by a commercial company it is standard-rated.
The tax authority decided that an assessment was justified on the basis of three different arguments:
SFTL was not an ‘eligible body’ – even if it did supply the training rather than SFL, the services did not qualify for VAT exemption and were therefore standard rated.
The arrangement between SFTL and SFL was “a wholly artificial arrangement” and an “abuse of rights.” It was therefore appropriate to redefine who was making the supplies in question. HMRC concluded it was SFL.
Even if the court decided that SFTL was both an eligible body and the arrangement was not an abuse of rights, the commercial reality was that SFL was providing the tuition. This approach was supported by the fact that all tutors were employed by SFL and the website clearly indicated that supplies were being made by SFL.
Supplies of education by an “eligible body” are exempt from VAT under VATA 1994, Sch 9, Group 6. The body must be precluded from distributing any profits it makes and must also reinvest any profit into future supplies of education.
I was recently asked by an accountant why one professional body charges 20% VAT on its CPD courses, but a second professional body treats the same type of courses as VAT exempt.
The answer is that because the first organisation uses the profit made on its events to fund other expenditure within the organisation (unlike the second body), it failed the second condition needed for VAT exemption by not reinvesting any surplus into future events.
This was an emphatic victory for HMRC. Judge Scott’s comments supported HMRC on every issue. She concluded: “SFTL’s primary raison d’etre is to invoice for the tuition services without applying VAT, which SFL cannot do. By remitting all of the gross income to SFL, SFL’s profits are maximised.”
I also like her comment: “SFTL was so far below the radar screen that it was virtually invisible.”
The company director Mr Smith argued that the setting up of a non-profit making body was standard practice in the ice and snow sports industry, and this seems to have been the main reason for going down the SFTL/SFL route.
Trying to copy other organisations is a dangerous strategy. Although he identified four different reasons for making such a split (the VAT saving was one of the reasons), the judge concluded that saving VAT was the primary motive, the other benefits being less important.
As a learning point, it is important to be cautious about any client who suggests forming a ‘non-profit making’ entity to save VAT. This was quite common a few years ago with golf club arrangements, but that approach has come unstuck in virtually all cases.
It is a shame that the legislation treats some supplies differently if an organisation is a charity or not for profit body, rather than a commercial body, but it is what it is.